- Ryan Mallory
Trying to trade shares for a living can be a huge amount of fun and very lucrative if you get it right. That’s why it’s important to decide what kind of investor or trader you are pretty quickly – and to try and stick to the strategy.
So, when you learn to try and pin some kind of reasonable value on a company, they’re usually either value-based or growth based although some can be a bit of both. These are what are often called “GARP” shares, which stands for growth at a reasonable price. And these shares often offer the best of both worlds.
They’re often best picked up on the back of bad news – particularly if that bad news looks temporary in nature. The market is a tremendously unforgiving place for growth companies which stutter in that growth pattern. Often, though, such companies are taking a temporary breather due to delayed orders or investment in new technology and the fundamental story remains intact. Yet in such cases where a growth company warns on profits, its share price can often get trashed to value levels. For example, this could be a case where the share is valued at less than cash and tangible assets. This is often ideal territory for private investors to strike.
by 401(K) 2013 Caption:Cash on the balance sheet helps minimise the downside
If you get it right, you can leverage up gains, but also have in place a strict stop-loss in case it goes too early and the share has further to fall. First off, then, it’s a good idea to learn how to spread bet to try and take advantage of these situations – and particularly while you’re still new to the whole game and trying to learn all you can whilst you’re still in other employment.
Minimising the downside risk is imperative here. Many investors will say never to try and catch a falling knife – but this coverall advice doesn’t fit every situation. The trick is to identify only temporary bad news, to try and time your purchase as well as you can (always accepting that you’re unlikely to hit the absolute low point of such a moving target) and to go for companies where the downside is limited due to a very strong balance sheet.
Of course, the rest of the market isn’t completely foolish and there’s always someone on the other side of each trade. In other words, you will never win them all, and you should accept some losses from time to time as an inevitable consequence of trading and/or investing.
But stacking the odds in your favour is what the game is really all about – and having more winners than losers.
Trying to find growth shares that have also become value plays can be a great way of maximising your potential profits and minimising the downside risk. But you will have to be patient – and wait for the ideal opportunities to come along. Often, real ex-growth value plays where the future growth remains intact don’t come along for a long while, then a couple may come all at once, particularly in the middle of an overall market slump.
by faungg's photo Caption: Buying good companies during overall market slumps can pay dividends for the brave
Equally important is patience in the other direction. So if you’ve placed a good trade and the share price starts to make some progress back in the upward direction, don’t be too eager to bank your profits. Usually, a period of two years or more is a good rule of thumb to see your investment through when you’ve taken a shot at a falling growth knife which has morphed into a value or GARP share. It’s tempting to bank a profit, but the old adage of “always run your winners” is perhaps more apposite in these situations than in any other.